Intriguing Question

[jpg7n16]

Unfortunately, like I mentioned, I only can contribute a paltry ~$1k to Roth IRA based on my income, but I appreciate your suggestion to not pre-fund the contributions.

I know that you mentioned this, but I don't think you did the proper calculation.

A few things to clear up:
-Our AGI is $161k; gross is around $181k. (I had some investment gains)
-We put in closer to 12% into 401k.

....

2. Regarding even contributing to the Roth IRA, based on my income, I have to add back the $10K Roth IRA contribution to my AGI to get new MAGI, which puts me in a partial status so I can only give 1K or something like that for 2011. I can barely understand what this means, so if anyone can help it would be appreciated. Plus, I already filed my taxes for 2011, so I unsure how this would even work.

Why are you adding back the $10k Roth contributions??

From: Publication 590 (2011), Individual Retirement Arrangements (IRAs)

2. Add the following deductions and exclusions:

• Traditional IRA deduction,
  
• Student loan interest deduction,
  
• Tuition and fees deduction,
  
• Domestic production activities deduction,
  
• Foreign earned income exclusion,
  
• Foreign housing exclusion or deduction,
  
• Exclusion of qualified bond interest shown on Form 8815, and
  
• Exclusion of employer-provided adoption benefits shown on Form 8839

Roth contributions are not added back to your AGI.

So your AGI would be $161k, and you would qualify for a full contribution.

[mcsmith76]

Why are you adding back the $10k Roth contributions??

Roth contributions are not added back to your AGI.

So your AGI would be $161k, and you would qualify for a full contribution.

Thank you! I don't know how I thought contributions to a Roth IRA are to be considered part of your modified AGI. So it appears I can contribute here for 2011 and likely even 2012.

[mcsmith76]

Yes, you will pay less in taxes if you put more into a 401k, for sure. The thing is that your withholding will adjust with the contributions. You may still owe $5k next year, but you will have paid less tax throughout the year.

I am still struggling to understand how I will pay less taxes on annual basis. I realize less tax will be taken out each paycheck, but won't I just have to give back the money come April?

In other words, won't I owe more tax back to the government in April if I max out my 401k ?

[jpg7n16]

In other words, won't I owe more tax back to the government in April if I max out my 401k ?

Nope. You are taxed on Total income minus all sorts of things. One of those things is 401k contributions.


So if you made $175k combined and contributed $30k combined to your 401k's, you start calculating income by taking:

$175,000 - $30,000 = $145,000

Minus itemized deductions, personal exemptions, etc. = taxable income


The tax brackets {and therefore, your tax liability} are based on taxable income (after 401ks, deductions, etc.)

The more you contribute to your 401k, the lower your taxable income, and therefore, the lower your taxes

[MonkeyMama]

No - you won't owe more back if you put more in to your 401k. Any contribution to a 401k is a deduction from your taxable income.

So, if you are in the 28% tax bracket (probably?), every $1000 you add to your 401k will save you $280 in Federal taxes. Plus, you might save on state taxes, too.

This is why it's wise to max out your 401ks at your income level - it can seriously decrease your taxes. You may be subject to AMT, and certain deductions are limited at higher incomes, so your tax savings can be much higher than 28%.

If you qualify for the ROTH, it's generally wise to max out your 401ks, and then put the tax savings into a ROTH. {It might be overwhelming to consider maxing both out, otherwise, but it kind of works out generally if you max out 401k you should save enough in taxes to fund a ROTH}.

[mcsmith76]

Thanks for all the help!